Latest Move Gets Netflix More Wrath

By JENNA WORTHAM and BRIAN STELTER

Published: September 20, 2011

Netflix, the company that changed the way tens of millions of people watch films and television shows, is quickly discovering that there's a downside to having cultivated a passionate fan base.

After Reed Hastings, the company's co-founder and chief executive, announced a plan - in a blog post and seemingly in a hurry a minute before midnight on Sunday - to split Netflix into two separate businesses, one for Internet streaming and one for DVDs by mail, the company's Web site was inundated with angry messages.

In many of the 17,000 comments (so far), disgruntled consumers mocked the name of the new DVD company, Qwikster, and predicted its demise. They complained that they would soon have to pay for and manage two separate accounts. And they wondered why Mr. Hastings was apologizing for ''arrogance'' - but not for disrupting a service that they adore.

''I just got your e-mail, and, as a long-time customer, quite frankly found it to be offensive. And perhaps a devastating miscalculation for your business,'' wrote David Isaacson, 47, of Chicago.

The lesson seems to be that all those customers who appreciate low prices, innovative products and lightning-fast customer service can swiftly turn when they feel slighted - perhaps because they know how responsive such companies have been in the past.

JetBlue, a cheery company by airline standards, was pummeled in 2007 when passengers were stranded on planes for up to 10 hours. Apple was battered last year when complaints about the antenna design of the iPhone 4 surfaced online.

Most such customer storms pass - Apple stock happened to close at a record high on Monday - and of course, the complaints ricocheting around the Web may not reflect the sentiment of all of Netflix's customers.

''We have to take what we're hearing through social media with a grain of salt,'' said Russ Crupnick, an analyst for the NPD Group. ''Netflix and Amazon are unchallenged in terms of how pleased customers are with their service. It's easy to confuse the noisy with the silent majority.''

But in the short term, the risk to corporate reputations is palpable.

''People love Netflix,'' said James L. McQuivey, an analyst at Forrester Research.

''What other media distributor adds two-plus million subscribers each quarter? Only Netflix and only because people are thrilled with it. But once you arouse such passions in people, you have to expect that they'll be equally passionate when they feel betrayed. And that's what has happened.''

Another customer, Aaron Tone, wrote on Netflix's site: ''it seems to me that companies that truly value their customers make the customer experience as helpful, seamless and easy to understand as possible.'' What Netflix had done, he added, was ''exactly the opposite.''

Netflix was considered a highflier of Silicon Valley and a business-school lesson in how to make a smooth transition from old technology (sending out DVDs by mail) to new (delivering streams of movies and shows on the Internet). But the company's stock price has been hammered since it introduced an unpopular price increase - $6 more a month - for its Internet-plus-DVD service this summer.

Netflix cast the pricing scheme as a necessary step that would allow it to keep mailing DVDs and would give it more money to spend on licenses for streaming content.

The change, however, has spurred about a million of its 25 million customers in the United States to drop their subscriptions, the company indicated last week, just the second time in the company's history that it experienced any drop, and its stock has fallen almost 52 percent since the change was announced.

In his blog post, Mr. Hastings suggested that the next step - breaking up the delivery systems into two separate companies - would allow each to grow and better serve customers. In an unusually personal way, he apologized for the way he handled the earlier announcement, which prompted a similar outpouring from customers. ''I messed up,'' he wrote, adding that at a time when Netflix was ''evolving rapidly,'' he did not communicate sufficiently with customers.

But that admission seemed only to increase the criticism and derision in some quarters. Netflix's stock closed at $143.75 on Monday, down an additional 7.37 percent.

''I have a feeling the apologies are just beginning,'' said Michael Gordon, the chief executive of Group Gordon, a corporate and crisis public relations firm in New York. ''They're catching customers off-guard by making huge changes and not providing a lot of explanation for them. It's been handled poorly.''

Netflix said the Qwikster service would be up and running in a few weeks and would be headed by Andy Rendich, who runs DVD-by-mail now. The company will start renting video games for the first time.

Analysts said the separation reflected the fact that DVDs and online streams had different cost structures and consumer demographics. Still, Mike McGuire, an analyst with Gartner who keeps a close eye on the entertainment industry, described the move as ''an unnecessary shift in brand.''

''The red envelope is what it is,'' he said. ''It doesn't need fixing.''

Echoing the complaints of some customers, Mr. McGuire said Netflix had not yet delivered on the promise of making the selection of its streaming service as compelling as its DVD-by-mail catalog. ''The streaming catalog still only offers a fraction of what is available on DVD,'' he said. ''Consumers aren't going to change their behavior if it's not a better service.''

Brooke Hammerling, the founder of the technology public relations firm Brew Media Relations, said the separation announcement felt as if it had been hastily pulled together.

On Monday afternoon, Netflix did not yet have an official Web site for Qwikster, just a holding page that promised it was ''launching soon.''

Social networking users noticed that the owner of the name Qwikster on Twitter was not a DVD distributor but a man with an Elmo profile picture whose page was filled with foul language and drug use references.

''If they were really serious about this and had been planning it for a while, they would have dotted all the i's and crossed all the t's,'' Ms. Hammerling said.

''They should have taken care of something as silly as making sure a pot-smoking Elmo isn't the owner of the Twitter account of their new service.''

This is a more complete version of the story than the one that appeared in print.